pwc doing business and investing in china

8/2/2019 PwC Doing Business and Investing in China

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Doing Business andInvesting in China


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Welcome

Dear Readers,PricewaterhouseCoopers China is proud to present youwith the latest Doing Business and Investing in Chinaguide.

China is the most dynamic trading economy in theworld, so it should be no surprise that companies whoare serious about expanding and remaining globallycompetitive continue to head to China. Ever since 1978,

when Chinas economic reorms began, the nation hasbeen developing at an unprecedented pace. Today,Chinas economy continues to power ahead, presentingever greater opportunities or oreign investors. In act,Chinas Foreign Direct Investment increased to aboutUS$75 billion in 2007, while merger and acquisitionactivities in China also continue to grow in strength.

As China rapidly transorms to becoming one o theworlds largest and astest growing marketplaces, anda home or the worlds emerging global companies, thequestion on most executives minds is this: How can Ibecome part o the action at this unique time in Chinashistory?

Multinational investors have entered into an era where theyare acing new challenges in operating their business inChina issues o increasing complexity that touch on thewar or talent, local market expansion and competition,

risk management and requent regulatory change.These issues orm the oremost concerns or corporateexecutives in China.

This guide has been prepared to assist oreign investorswho are taking initial steps to establish and grow theirbusiness in China, as well as those who have signicantoperations in China and are interested in being updatedwith the most recent important changes in tax, accountingand investment related regulations.

Doing Business and Investing in China


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All the chapters in this guide are contributed by thepractice leaders in the PricewaterhouseCoopers ChinaAssurance, Tax and Advisory lines o services. Thematerial contained in this guide was assembled on31 December 2007 and, unless otherwise indicated, isbased on inormation available at that time.

We hope you nd this guide practical and insightuland that it will become your regular reerence material.That said, please note that the guide is not intended toexhaustively cover the subjects it addresses but ratherto answer some o the important, broad questions thatmay arise or investors. When specic problems occurin practice, it will be necessary to reer to the speciclaws and practices and to obtain appropriate proessionaladvice.

Please contact us at one o our 12 oces in China shouldyou wish to know more about how we can help you

do business in China. We look orward to helping yousucceed in one o the astest growing emerging marketsin the world.

Silas Yang ()

Executive Chairman& Senior Partner

Welcome



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Table o contents

Introduction to PricewaterhouseCoopersPricewaterhouseCoopers China Oces

Key contact people

Our locations in China

Chapter 1 Peoples Republic o China A Prole

Chapter 2 Business environment

Chapter 3 Business entitiesChapter 4 Restrictions on oreign investment and

investors

Chapter 5 Investment incentives

Chapter 6 Banking and nance

Chapter 7 Exporting to and rom China

Chapter 8 Labour relations and working conditions

Chapter 9 Audit requirements and practices

Chapter 10 Accounting principles and practices

Chapter 11 Tax system

Chapter 12 Tax administration

Chapter 13 Taxation o corporations

Chapter 14 Taxation o oreign enterprises

Chapter 15 Taxation o shareholders

Chapter 16 Partnership enterprise

Chapter 17 Taxation o individuals

Chapter 18 Indirect taxes

Chapter 19 Tax treaties

Chapter 20 Transer pricing

Chapter 21 Mergers and Acquisitions

1-34-6

7-8

9

10-19

20-28

29-4243-50

51-57

58-76

77-90

91-101

102-108

109-126

127-134

135-144

145-158

159-166

167-168

169-172

173-184

185-194

195-200

201-212

213-223



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Appendix I Corporate income tax rates Appendix II Tax depreciation rates

Appendix III Corporate tax calculations

Appendix IV Tax treaty summary

Appendix V Tax rates Foreign nationals working inChina

Appendix VI Personal allowances Foreign nationalsworking in China

Appendix VII Individual tax calculation Foreignnationals working in China

Appendix VIII Selected indirect taxes

Appendix IX Illustrative nancial statements

Appendix X Comparison between China AccountingStandards and IFRS

Appendix XI Government o the Peoples Republic oChina

224225-226

227

228-234

235

236

237-238

239-243

244-251

252-254

255

Table o Contents



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Doing Business and Investing in China 1

Introduction to PricewaterhouseCoopers

About PricewaterhouseCoopers Globally

PricewaterhouseCoopers (www.pwc.com) providesindustry-ocused assurance, tax and advisory servicesto build public trust and enhance value or its clientsand their stakeholders. More than 146,000 people in150 countries across our network share their thinking,experience and solutions to develop resh perspectivesand practical advice.

PricewaterhouseCoopers reers to the network omember rms o PricewaterhouseCoopers InternationalLimited, each o which is a separate and independentlegal entity.

About PricewaterhouseCoopers China

PricewaterhouseCoopers China is the leading proessionalservices rms in China (www.pwccn.com), Hong Kong

(www.pwchk.com), and Macau with a total strength oover 9,000 people, including close to 330 partners.

Complementing our depth o industry expertise andbreadth o skills is our sound knowledge o the localbusiness environment in mainland China and HongKong. We are committed to working with our clientsto deliver the solutions that help them take on thechallenges o the ever-changing business environment.

The rm had its origins in China in 1906, when itestablished an oce in Shanghai, and has beenestablished in Hong Kong since 1902. TodayPricewaterhouseCoopers has oces on the mainlando China in Beijing, Chongqing, Dalian, Guangzhou,Qingdao, Shanghai, Shenzhen, Suzhou, Tianjin andXian, as well as in Hong Kong and Macau (SpecialAdministrative Regions).


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2 Doing Business and Investing in China

Helping multinational companies to invest in China

Comprising specialist business advisors andaccountants, PricewaterhouseCoopers China has themost extensive resources, widest geographical coverageand the greatest in-depth expertise o all the proessionalservices rms in China.

The primary ocus o the rm is our commitmentto providing high-quality services to multinational

companies investing in China. Our strong capabilityto meet this commitment is based on a strategy oidentiying the nature and extent o services to beprovided and committing the level o investmentnecessary to provide these services to standardsrequired by international investors.

Helping Chinese companies with securities listings

and to succeed domestically and internationally

Many Chinese enterprises have already listed in localand overseas stock exchanges. Many have expandedinternationally, making their debut on the globe stage.PricewaterhouseCoopers China has made a signicantinvestment and has built a leading presence in assistingChinese companies in this endeavour.

Services

We provide a ull range o business advisory services tooreign investors in China, including the ollowing:

Advice on market entry to international companies,including general business advice, market research,market analysis, strategy studies, joint ventureidentication and negotiation, establishment andregistration o oces and personnel, easibilitystudies, due diligence, business valuation, capitalverication, tax structuring and planning, completingaudits and management systems and processes.



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Operational support to international companies,including business eectiveness, amalgamation andrestructuring o joint ventures, IT systems advice,corporate, personal and indirect tax advice and riskmanagement, labour practice compliance, oreignexamination reports, management and head-ocereporting and statutory auditing services.

The business environment in China is unique. Aneective business advisor must have the experience othe business environment in China to meet the businessadvisory needs o international and domestic clients.We have acted as advisors to multinational companies,state-owned enterprises, joint ventures, representativeoces, and other business entities engaged in awide range o activities throughout the country. Thisexperience ensures that we are in a position to provideour clients with the highest quality advice available.



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PricewaterhouseCoopers China Oces

Beijing

7

A26

100020

26/F Oce Tower ABeijing Fortune Plaza7 Dongsanhuan Zhong RoadChaoyang District

Beijing 100020, PRCTel: +86 (10) 6533 8888Fax: +86 (10) 6533 8800

Shanghai

202

11

200021

11/F PricewaterhouseCoopers Center

202 Hu Bin RoadShanghai 200021, PRC

Tel: +86 (21) 6123 8888Fax: +86 (21) 6123 8800

Hong Kong

22

22/F Princes BuildingCentral

Hong KongTel: +852 2289 8888Fax: +852 2810 9888

Chongqing

68

191905

400010

Room 1905

19/F Metropolitan Tower68 Zou Rong RoadChongqing 400010, PRC

Tel: +86 (23) 6393 7888Fax: +86 (23) 6393 7200


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Dalian147

8

116011

8/F Senmao Building147 Zhongshan Road, Xigang DistrictDalian 116011, PRC

Tel: +86 (411) 8379 1888Fax: +86 (411) 8379 1800

Guangzhou

161

25

510620

25/F Center Plaza161 Lin He Xi RoadGuangzhou 510620, PRC

Tel: +86 (20) 3819 2000

Fax: +86 (20) 3819 2100

Macau

28C

Unit C, 28/FBank o China BuildingAvenida Doutor Mario SoaresMacau

Tel: +853 8799 5111Fax: +853 8799 5222

Qingdao

59

4601

266071

4601, Qingdao International Finance Center59 Hong Kong Middle Road

Qingdao 266071, PRCTel: +86 (532) 8089 1888Fax: +86 (532) 8089 1800



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Shenzhen5002

38

518008

38/F Shun Hing SquareDi Wang Commercial Centre5002 Shennan Road EastShenzhen 518008, PRC

Tel: +86 (755) 8261 8888

Fax: +86 (755) 8261 8800

Suzhou

188

1501

215028

Room 1501, Genway Tower188 Wang Dun RoadSuzhou Industrial Park

Suzhou 215028, PRCTel: +86 (512) 6273 1888Fax: +86 (512) 6273 1800

Tianjin

189

117

300051

17/F The Exchange Tower One

189 Nanjing Road, Heping DistrictTianjin 300051, PRC

Tel: +86 (22) 2330 6789Fax: +86 (22) 2339 3662

Xian

30

728

710002

Room 728Zhongda International Mansion30 Nan Da StreetXian 710002, PRC

Tel: +86 (29) 8720 3336Fax: +86 (29) 8720 3335



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Key contact people

Frank Lyn - China Markets LeaderTel: +86 (10) 6533 5015Email: [email protected]

Cassie Wong - China Tax Leader

Tel: +86 (10) 6533 3195Email: [email protected]

NORTHERN CHINA

Tax

Edward Shum


AssuranceThomas Leung


Advisory

Malcolm MacDonald



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CENTRAL CHINA

Tax

Tony Kwan


Assurance

Randy Ko


Advisory

Benjamin Ye

Tel: +86 (21) 6123 2458

Email: [email protected]

SOUTHERN CHINA

Tax

Charles Lee


Assurance

Richard Sun

Tel: +852 2289 1161Email: [email protected]

Advisory

David Brown

Tel: +852 2289 2369Email: [email protected]

Key contact people


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Shanghai

Shenzhen

XianTianjiin

Qingdao

Dalian

Chongqing

Guangzhou

Suzhou

MacauHong Kong

Beijing

Our locations in China


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Peoples Republic o China A ProleChapter 1

Key messages

On 12 November 2001, China was admittedto become a ull member o the World TradeOrganization (WTO), which has resulted in greaterliberalisation o many services and industry sectors,as well as a reduction in customs duty. Foreigninvestors operating in distribution, logistics, nancialservices, telecommunications, and other sectors havebeneted rom this liberalisation. Most o the WTOliberalisation should have been realised by December2007, i.e. six years ater accession.

Many new laws, business regulations and tax ruleshave been issued ater Chinas WTO accession in2001, resulting in the continuous need or investors toadapt their operations and entity structures in China.

China today is the ourth-largest economy in theworld, with sustained average economic growth o9.5% or about the past three decades. In 2007, itsnominal gross domestic product totalled more thanUS$3.4 trillion, reaching an overall GDP growth rate o11.4% in 2007.

Chinas Foreign Direct Investment increased to aboutUS$75 billion in 2007.

China was awarded the right to host the 2008Olympic Games in Beijing and is the third Asiancountry to receive such an honour.

Shanghai, China will be the host city o the WorldExposition in 2010. The Exposition will be the rst tobe held in a developing country.


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Legal system

The National Peoples Congress and its StandingCommittee are empowered to exercise legislativepower. The State Council is also authorised to adoptadministrative regulations and measures in accordancewith the Constitution and laws. At the local level, thePeoples Congress o the provinces, autonomous regionsand municipalities directly under the Central governmentmay also adopt local regulations, provided they do notcontravene the Constitution or the State laws.

The Peoples Courts are the judicial organs o the state,and the judiciary is able to exercise independent powerin accordance with the law. The Supreme Court is thehighest in the land and is accountable to the NationalPeoples Congress and its Standing Committee. Itsupervises the administration o justice by the PeoplesCourts, which are established at dierent levels. There

are also special courts, such as those dealing withmilitary and maritime issues.

The Economy

General description

Prior to 1978, China maintained a centrally planned, orcommand economy. Subsequently, China launchedseveral economic reorms. The Central governmentinitiated price and ownership incentives or armers. Italso established our Special Economic Zones (SEZs)along the coast or the purpose o attracting oreigninvestment, boosting exports, and importing hightechnology products into China. Additional reorms,which ollowed in stages, sought to decentraliseeconomic policymaking in several sectors, especiallytrade.

Peoples Republic o China A Prole


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Economic control o various enterprises was given toprovincial and local governments, which were generallyallowed to operate and compete on ree marketprinciples, rather than under the direction and guidanceo state planning. Additional coastal regions and citieswere designated as open cities and development zones,which allowed them to experiment with ree marketreorms and to oer tax and trade incentives to attractoreign investment. Chinas transition was highlighted to

the rest o the world when ormer leader Deng Xiaopingamously toured economic enclaves in southern Chinain 1992 as a way o urther promoting Chinas need tostick to a path o economic liberalisation. Beginning rom1993-94, the reorm o the state sector became a priority,with the central government aiming to restructure manyo its state-owned enterprises (SOEs).

The change in policy direction had a proound impact.Chinas economy grew at an average rate o about 10%per year during the period 1990-2006, the highest growthrate in the world. Real GDP growth is orecast to slowslightly but will remain impressive. The governmentis attempting to boost the contribution o privateconsumption to overall growth. The tax burden on ruralresidents will all, increasing their disposable income.The growing trend or urban Chinese to buy homes andcars will also give a positive stimulus to consumptionspending during the orecast period.

Chinas trade surplus hit a record US$262.2 billion in2007, overtaking Japan to make China the worlds third-largest trading nation ater the US and Germany. Suchhigh growth is necessary i China is to generate the15 million jobs needed annually or new entrants into thejob market.


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Foreign investment

In the early days o Chinas economic reorm, Chinastill adopted a centralised, planned economy underwhich the domestic economy, enterprise management,production management, material supply and salarysystem were centrally controlled and managed.However, in order to attract oreign investment andacilitate the operations o oreign investment enterprises,the Chinese government has adopted numerouspreerential policies that were dierent rom thoseor domestic enterprises. The success in attractingoreign direct investment has greatly contributed tothe modernisation o China and set the scene or thecurrent economic growth and success in China. Inrecent years, with the constant improvement o theinvestment environment and the adoption o the socialistmarket economy, China has begun to introduce greateruniormity in taxation policies and business regulations toboth domestic and oreign-invested companies.

In March 2006, the National Development andReorm Commission announced its 11th ve-yearprogramme. Specically relating to the utilisation ooreign investment, the programme has called or aradical change rom quantity to quality o oreigninvestment. Actions are called or shiting the ocuso oreign investment rom quantity o Foreign Direct

Investment (FDI) to attracting projects that bring inadvanced technology, management expertise and high-calibre talent. In addition, more emphasis is given toattracting projects that help with ecological construction,environmental protection and conservation, and the moreecient use o resources and energy.

In 2007, exports rom Foreign Invested Enterprises (FIEs)increased by 23.4%, accounting or 57.1% o Chinastotal exports. Imports increased by 18.4%, or 58.5% ototal imports. The number o newly approved oreign-invested projects ell by 8.7% to 37,871 while utilisedoreign direct investment (FDI) increased by 13.6% toUS$74.77 billion.


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The leading sources o investment include Hong Kong,Japan, the US, Taiwan, Singapore and South Korea.

Foreign exchange

Starting rom the beginning o the open door policy in1978, there have been oreign exchange restrictionsin China. It is not completely ree to convert oreigncurrency in China. In the past, a maximum limit tokeep oreign currency was set or each enterprise.Enterprises were required to sell excess oreign currencyto banks. Ater years o strong economic growth andwaves o oreign direct investment, a substantial oreigncurrency reserve has been accumulated by the Chinesegovernment. As o 31 December 2007, according to theState Statistics Bureau, the oreign currency reserve hasreached US$1.53 trillion. With this sizeable reserve, therelevant oreign exchange restrictions have been relaxinggradually.

Foreign trade

Chinas oreign trade was originally conducted throughoreign trade corporations under the Ministry o ForeignTrade and Economic Corporation. Since joining theWTO, the import and export trading sector has beenliberalised, except or a small number o products.

Geography

Situated in East Asia along the coastline o the PacicOcean, China is the worlds third largest country, aterRussia and Canada, with an area o 9.6 million squarekilometres and a coastline o 18,000 kilometres.

Although China is more commonly known or being onevast land area, people tend to divide China into our mainregions the North, South, Northwest and the Qinghai-Tibetan areas. Due to the geographical dierences,residents o each region have distinctive liestyles andcustoms.


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There are 23 provinces, ve autonomous regions, ourmunicipalities, and two special administrative regions.The municipalities are Beijing, Shanghai, Tianjin andChongqing.

Most industrial development and oreign investment isbased along the coast, especially in Shanghai and inthe urther southern areas o Guangzhou, Shenzhen andFuzhou. There is also signicant oreign investment inthe northern coastal cities o Dalian and Tianjin. Thecapital, Beijing, which is located inland in the north, hasattracted many multinational holding companies.

Climate

China has a climate dominated by monsoon winds. Iteatures clear temperature dierences in winter andsummer. In winter, northerly winds coming rom highlatitude areas are cold and dry, and in summer, southerlywinds rom sea areas at lower longitudes are warm andmoist.

Precipitation varies regionally even more thantemperature. China south o the Qin Ling mountainrange experiences abundant rainall, most o it comingwith the summer monsoons. To the north and west othe range, however, rainall is uncertain. The arthernorth and west one moves, the scantier and more

uncertain it becomes. The northwest has the lowestannual rainall in the country and no precipitation at all inits desert areas.

North

Northern winters, rom December to March, can beextremely cold. Beijing may experience temperaturesreaching below 0oC at night. Further north, -10oC is notuncommon, and you can see the curious sight o sanddunes covered in snow.

During the summer, rom May to August, temperatures inBeijing can hit 38oC, coinciding with the rainy season orthe city.



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The best time or visiting the north is in spring andautumn. Daytime temperatures range rom 20oC to 30oCand drop considerably at night.

South

Near Guangzhou, the summer is a season o typhoonsbetween July and September. Temperatures can rise toaround 38oC. Winters are short, between January andMarch. The average temperature in winter is 15

oC.

Autumn and spring can be good times to visit, withdaytime temperatures in the 20

oC to 25

oC range.

Sometimes, it can be miserably wet and cold, with rainor drizzle.

Northwest

It gets hot in summer, dry and sunny. The desert regionscan be scorching in the daytime. Turphan, which sits in adepression o 150m below sea level, is reerred to as thehottest place in China with maximums o around 47

oC.

In winter this region is as severely cold as the rest onorthern China. Temperatures in Turphan during winterare only slightly more avourable to human existence.

This area o China experiences little rain, and as aconsequence, the air is very dry. Summers, however,can exceed 40

oC, while winters may drop below -10

oC.

Language

The Chinese language uses a pictographic systemand employs many thousands o characters, makingit remarkably dicult to learn. The characters usedin mainland China are a simplied type versus thoseused in Hong Kong and Taiwan, which are traditionalcharacters.



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Putonghua (or Mandarin), based on the Beijing dialect,has been the national language since 1957. It is taughtin all schools and is the language o government,although there are numerous other dialects used invarious regions including Cantonese, Shanghainese,Fukienese and Hakka. Non-Chinese languages arealso spoken by minorities including Mongolian, Tibetan,Uighur and other Turkic languages and Korean.

On 1 January 1979, the Chinese government ociallyadopted the pinyin system or spelling Chinese namesand places in Roman letters. A system o Romanisationinvented by the Chinese, pinyin is widely used in Chinaon street and commercial signs as well as in elementaryChinese textbooks as an aid in learning Chinesecharacters. Variations o pinyin are also used as thewritten orms o several minority languages.

Tips or the business visitor

Visitor visas

A oreign business visitor must obtain a visa, whichis issued by Chinese embassies and consulates. It isnecessary to stipulate on the visa application orm thepoints o entry and exit.

Currency

The currency o China is the Renminbi RMB. The basicunit is the Yuan , which is divided into ten jiao. Thesmallest division is the en, or cent. One jiao equals tenen; one yuan equals 100 en.

Notes o the latest version are issued in denominationso 100 yuan, 50 yuan, 20 yuan, 10 yuan, 5 yuan, 2and 1 yuan as well as 5 jiao, 2 and 1 jiao. Coins are indenominations o 1 yuan, 5 jiao, 1 jiao, 5 en, 2 and 1 en.


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Prevailing exchange rates as at 3 April 2008 were asollows:

Table 1

Currency RMB

American Dollar 7.0185

Australian Dollar 6.4107

British Pound 13.9156

Canadian Dollar 6.8991

Euro 10.9615

Hong Kong Dollar 0.9012

Japanese Yen 0.068293

New Zealand Dollar 5.5481

Singapore Dollar 5.0903

South Korean Won 0.007193

Swiss Franc 6.9161

Taiwan Dollar 0.2311

using values from 3 April 2008. Source http://www.x-rates.com

International Time

All o China is on Beijing time. China is 8 hours aheado Greenwich Mean Time and 12 -13 hours ahead o US

Eastern Standard Time.

Business Hours

In most cities in China, businesses and governmentoces are usually open Monday through Friday androm 8:00am to noon and rom about 1:00pm to 5:00pm,although this can vary depending on the organisation.China has a ve-day working week consisting o 40

hours. Banks are open Monday through Friday rom9:00am to 5:00pm. Shops are generally open every day.


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Most o Chinas business world slows down considerablyduring the spring estival in late January and earlyFebruary. Business visitors would be wise to avoid thistwo to three week holiday period.

Statutory Holidays

Chinas public holidays are:

January 1New Years Day

January/February (depending on the lunar calendar)Chinese New Year (3 days)

April (depending on the lunar calendar)Qing Ming Festival

May 1Labour Day

June (depending on the lunar calendar)Duan Wu Festival

September (depending on the lunar calendar)Mid-Autumn Festival

October 1-3National Day

Note that in addition to the holidays listed above,individual provinces may observe provincial holidays.

Weights and Measurements

Conducted mainly in the metric system.

Dates and Numbers

For dates written in English, sequence o day, month, yearis normally adopted, e.g. 15 June 2007 or 15/06/2007. InChinese characters, the reverse is the case.



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Business environmentChapter 2

Key messages

China joins the WTO and market access graduallyphased in.

Despite considerable bureaucracy, the government ismaking eorts to promote oreign investment.

Although many industries are largely state-owned, thenon-state sector, made o collectively-owned, oreign-owned and private companies, is rapidly gainingimportance in the Chinese economy.

China has been proactive in removing tari andnon-tari barriers or trade in goods through thenegotiation and implementation o regional ree tradeagreements.

Certain oreign exchange restrictions are in place.

Preerential tax treatment such as tax holidays and

reduced tax rates or enterprises in Special EconomicZones have been removed with the implementation oa new corporate income law eective rom 1 January2008. Incentives are now available or high techbusinesses.

There are market access and production controls, aswell as restrictions on operations.

Distribution and some service sectors are open to

oreign investors.Chinas new anti-monopoly law will come into eecton 1 August 2008, and China will join other countrieswith anti-trust laws that regulate competition.

Managers and skilled labour are in short supply.

Protection o intellectual property is an area oconcern.


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Business environment

General business climate

China ocially joined the WTO in November 2001, andoreign investment and trade has grown rapidly as aresult. Under the WTO, taris on agreed products havebeen reduced, and market access to various regulatedindustries has been phased in gradually. Industrialsectors opened up in the past 5 years are trade anddistribution, including ranchising, advertising services,inspection services, reight orwarding agency services,or example. A more open market will attract know-how, technology, services and materials. These imports,together with Chinas rich manpower, both skilledand unskilled, have turned China into one o the mostimportant manuacturing bases in the world.

China still holds a number o challenging areas ororeign investors. Nevertheless, the government ismaking eorts to address some o the issues in order

to urther encourage oreign investment. For example,through the amendment o the Law on Wholly Foreign-owned Enterprises (WFOEs), the Law on CooperativeJoint Ventures (CJVs) and the Law on Equity JointVentures (EJVs) in 2000 and 2001, China has relaxedits requirements on oreign exchange balancing and rawmaterials sourcing or Foreign Investment Enterprises(FIEs). Now, FIEs are no longer required to give priorityto the local market when purchasing raw materials,

uels and other materials. Similarly, the requirementor WFOEs and CJVs on balancing oreign exchangeincomes and expenditures has been repealed.

Large areas o Chinas economy are increasinglybecoming more market oriented, and a smaller rangeo sectors and products is now under administrativecontrol. Current industrial policy places emphasis onthe need to strengthen basic industries, inrastructure,energy, and transport. Market orces are now playing amore dominant role in China, and the business climate


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is less subjected to state administrative guidance thanbeore. Foreign participation in investment projectscontinues to be encouraged by the Chinese authorities,and measures are being taken to make the investmentclimate more avourable and less bureaucratic. TheChinese government gradually delegated more oreigninvestment approval authority to local governments. Thisis considered another step towards reducing bureaucracy.

Priority areas or oreign investment remain those wheremodern technology, environmental protection, energy andwater conservation are required. The coastal areas haveexperienced a greater degree o industrial developmentthan the inland areas, oering improved inrastructuralacilities and a number o other benets to oreigninvestors. In addition, the government has issued a serieso laws and regulations intended to encourage oreigninvestment in the central and western regions o China.

Framework o industry

State-owned enterprises (SOEs) still maintain animportant role in the economy. Notwithstanding this,the non-state sector, made up o collectively-owned,oreign-owned and private companies, is rapidly gainingimportance and now accounts or the majority o grossindustrial output value.

The private sector is becoming increasingly important asChina transits to a socialist market economy. To enhancethe growth o private enterprises which have beendominated by small and medium enterprises (SMEs), theChinese government has chosen several municipalitiesin which to launch SME-acilitating policies. SOEs stilldominate in some sectors such as oil, power, tobacco,steel, petrochemical, automobile, communication, railway,aviation and nancial industries.



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Both FIE and domestic enterprises are encouraged toparticipate in high tech industries (including sotware,integrated circuit, R&D, or example).

Overseas trade relations

Memberships in trade blocs

China ocially became a member o the WTO inNovember 2001. In this connection, China has phase-by-phase lowered tari rates and eliminated non-taribarriers to trade, including quotas, import licenses andunwarranted inspection requirements. In addition, Chinaneeds to address the issues o legal and regulatorytransparency, the protection o intellectual propertyand the opening up o banking, telecommunications,insurance, and other service industries.

Regional ree trade agreements

At the regional and bilateral level, China has beenproactive in removing tari and non-tari barriersor trade in goods through the negotiation andimplementation o ree trade agreements (FTA).

China signed an FTA with ASEAN (Association o SouthEast Asia Nations) in November 2002 which providesor enhanced economic cooperation in trade in goods,services and investment. The more important areas andsources o preerential ASEAN market access, in termso ewer tari and non-tari barriers have come intoeect at varying times beginning 1 January 2005. TheFTA represents a signicant opportunity or companiestrading between ASEAN and China to reduce supplychain costs and increase overall price competitivenessand protability.



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In addition, China has signed CEPA agreements (CloserEconomic Partnership Arrangement) with Hong Kongand Macau which were originally implemented in 2004and subsequently expanded in 2005, 2006 and 2007.In principle, China has agreed to grant zero taris toall goods o Hong Kong and Macau origin other thanprohibited imports.

The implemented FTAs also include the BangkokAgreement (consisting o members o China, India, SouthKorea, Sri Lanka, Bangladesh and Laos), the China andChile Agreement, and the Early Harvest Programme oChina and Pakistan Agreement.

More FTAs are under negotiation including with Australia,Iceland, South Korea, GCC (Gul Cooperation Council)and SACU (The Southern Arican Customs Union), amongothers. In April 2008, New Zealand was recognised orbeing the rst developed nation to sign an FTA with China.

Exports

With the exception o certain items subject to stateexport restrictions, most products exported by oreigninvestment enterprises are exempt rom export duties.The general rate or value-added tax (VAT) is 17%. Bylaw, except or certain special products, exports are zerorated, i.e. no VAT will be levied on exports, and input VATwill be reunded.

With the pressure o persistent trade surpluses with majororeign trading partners and with concerns about resourcepreservation and environmental protection, there havebeen adjustments (i.e. lowered or eliminated) to the exportVAT reund rate since 2004, which increase exportersoperating costs.



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These zones were created primarily to attract oreigninvestment by oering investors tax and other incentives.Tax incentives, including preerential income tax ratesand tax holidays, were oered under the Income TaxLaw on Enterprises with Foreign Investment and ForeignEnterprises and its Implementation Rules. With thenew Corporate Income Tax Law, which took eect rom1 January 2008, tax incentive policy is shiting romgeography-based tax incentives to predominantly

industry oriented and limited geography-based taxincentives. The new tax incentive policy is ocused onhigh and new technology industries.

Aside rom income tax preerential treatments,exemptions or reductions in business taxes and VAT arealso available to certain technology related arrangementsor projects, subject to satisying certain conditions.

Anti-Trust Law impact oreign investment

China has passed an anti-monopoly law which willcome into eect on 1 August 2008. Foreign investorsdoing business in China need to consider the immediateimpact o this new law on their businesses. Mergerand acquisition transactions in China involving oreignparties will be subject to review and can be halted due toantitrust reasons. Acquisitions o domestic enterprisesby oreign investors that may have implications or

national security shall be subject to more stringentreview.

Local competitor attitude toward oreign investment

In order to acquire oreign technology, capital andknow-how, Chinese domestic enterprises recognise theimportance o entering into joint ventures with oreignenterprises. However, there are restrictions on the extent

o oreign participation allowed in certain sectors and insome sectors oreign investment is not permitted at all.



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Such restrictions, however, are gradually being phasedout with Chinas accession to the WTO. In addition tojoint ventures, WFOEs are also allowed, provided thesectors in which they operate are not subject to 100%equity restrictions.

Labour attitude toward oreign investment

The dierences between Chinese and western

management styles can oten prove a problem or oreignjoint venture partners due more to cultural dierences,language and communications rather than prejudicesagainst oreign management. Major improvements havebeen made in recent years as a pool o talented localsta is being developed in major cities through trainingin modern management techniques and exposure tooverseas work experiences.


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Business entitiesChapter 3

Key messages

Foreign companies may operate through permanentestablishments or representative oces or establishoreign investment enterprises, i.e. Sino-oreign jointventures and wholly oreign-owned enterprises.

Foreign invested banks are permitted to establishcorporations and branches in designated locations.

Enterprises, including oreign investment enterprises,can set up branches in other parts o China.

Foreign enterprises may be able to open branches ona restricted basis.

Certain oreign investment enterprises and oreignprojects require prior government approval.

Capital and prots are generally allowed to berepatriated, subject to certain requirements.

A national company law allowing or the establishmento limited liability companies and companies limitedby shares became eective on 1 July 1994.

Forms o business

The principal orms o business open to oreign investorsin China are classied under the ollowing headings:

Foreign investment enterprises

An FIE reers to equity joint ventures, cooperative jointventures with limited liability, WFOEs, and oreigninvestment companies limited by shares.

Equity joint ventures

An equity joint venture is a separate legal entity andtakes the orm o a limited liability company registered

in China. The partners have joint management o thecompany and prot sharing is according to the ratio oeach partners capital contribution.


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Cooperative joint venturesThe parties to cooperative joint ventures may applyor approval to have the company structured asa separate legal entity with limited liability. Protsharing is dened in the contract and can vary overthe contract terms. In addition, there is a orm ounincorporated cooperative joint venture which isnot a legal entity. Income and expenses are sharedamongst partners based on the contract terms.

Income tax should be imposed on the individualjoint venture parties instead o the unincorporatedcooperative joint venture.

Wholly Foreign-owned Enterprises

WFOEs are established exclusively with the oreigninvestors capital. They are limited liability companies.

Joint stock companies

Joint stock companies, also known as companieslimited by shares, are established primarily in order tobe able to list on Chinese or oreign stock markets.The capital stock o a joint stock company is madeup o equal value shares. Contributions are made byboth domestic and oreign shareholders.

Foreign enterprises

In general, oreign enterprises are enterprises otherthan oreign investment enterprises in China that haveestablishments or places o business in China andengage in production or business operations. Foreignenterprises that do not have establishments or placeo business in China but derive certain China-sourceincome are also included in this category.

Foreign enterprises include representative oces, sitesor the exploitation o natural resources, contracted

project sites, and companies providing labour services oremploying business agents.

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Branches o oreign enterprisesUnder the Company Law a oreign company mayestablish branches in China. A branch does not havethe status o a Chinese legal person, and the oreigncompany assumes the civil liabilities o its branches inChina. However, in practice, only oreign banks havebeen granted licenses to open branches.

Equity joint venturesFormation procedures

Equity joint ventures are governed by the Law o thePeoples Republic o China on Joint Ventures UsingChinese and Foreign Investment that was promulgated in1979. The latest amendments to the law were made in2001.

The Ministry o Commerce (MOFCOM) has overall

responsibility or approving joint ventures and or issuingthe approval certicates. The local MOFCOM authoritiesgenerally undertake the examination and approvalprocedures.

Once the approval certicate has been received, theventure has to register within one month with theadministrative bureau o industry and commerce in therelevant locality to obtain a business license. Thirty days

ater the business license is issued, the joint venturemust register with the local tax authorities.

Capital structure

The equity joint venture law requires that the oreignpartner to the venture contribute generally at least 25%o the registered capital. No upper limit on the oreignpartners contributions has been set, except in somespecial industries where regulations require the Chinese

partners share to give them dominant control.

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Capital contributions o an equity joint venture can takethe orm o cash, capital goods, industrial property rightsand other assets. In general, the Chinese partner willcontribute cash, land development or clearance ees andland use rights, while the oreign partner will contributecash, construction materials, equipment and machinery.All joint venture contracts should contain a scheduleor capital contributions. I the capital contribution isto be a single payment, all partners must pay the ull

amount within 6 months o the date the business licenseis issued. A temporary business license can be issuedduring the period in which capital contributions are tobe made. I the partners do not make their contributionwithin the stipulated time rame, the temporary businesslicense will not be renewed. All capital contributionsmust be certied in a report rom a Chinese registeredCPA rm (this may be either an international accountingrm acting through a Sino-oreign joint venture or a

Chinese CPA rm) as conrmation that the contributionslisted in the contract have been received.

During the lie o an equity joint venture, the oreignpartners equity contribution should normally not berepaid. However, once the venture has been liquidated,the net assets (i any) are distributed according to thepartners shareholdings.

Relationship o shareholders, directors and ocers

The partners o an equity joint venture share jointmanagement o the venture. The board o directors hasthe authority to make all major decisions concerningthe nancial position o the venture. The joint venturepartners are responsible or appointing the boardmembers, and representation generally matches theproportion o ownership interest in the venture. Also, thelaw requires that a meeting o the board be held at least

once each year. The board o directors is required to

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engage a general manager and deputy managers. Thegeneral manager is responsible or carrying out boarddecisions and is in charge o the daily management othe venture.

The prots and losses o an equity joint venture aredistributed according to the ratio o each partnersinvestment. Ater the payment o taxes and beore thedistribution o prots, the joint venture is required tomake allocations to three unds, namely, a sta bonusand welare und, an enterprise expansion und and ageneral reserve und. The amount contributed to thethree unds by the venture may be designated in the jointventure contract or decided by the board o directors.All the previous years losses must be cleared beore thecurrent years prots can be distributed.

Liquidation and receivership

Liquidation o an equity joint venture must be conductedpursuant to the Foreign Investment EnterprisesLiquidation Procedures, eective as o July 1996. Oncedissolution has occurred, the board o directors mustestablish the liquidation procedures and principles andappoint a liquidation committee. The ventures directorsare usually appointed to the liquidation committee,although, i problems arise in this respect, local PRCaccountants or lawyers may be invited to carry out the

liquidation procedures. I the examination and approvalauthority deems it necessary, it may appoint its ownpersonnel to supervise the process.

The joint venture must settle all its debts, including thecost o liquidation, beore the remaining assets can bedistributed among the joint venture partners. Thesewill be distributed according to the investment ratio,unless other provisions are contained in the contract andarticles o association. I the oreign partners remainingnet assets exceed its investment contribution, the oreignpartner would be required to pay income tax on theremaining portion.

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Books and records

For statutory requirements regarding the keeping obooks and records see Chapter 9.

Statutory audit

Joint ventures are required to engage a CPA rmregistered in China to audit their annual accountingstatements and books o accounts. The national

deadline or submission o audited statutory accountsis 31 May; however, local authorities may impose earlierdeadlines in certain cases (See Chapter 9).

Cooperative joint ventures

Formation procedures

Cooperative joint ventures are governed by the Lawo the Peoples Republic o China on Chinese-ForeignCooperative Joint Ventures, promulgated in April 1988and revised in 2000. The law provides that the venturecan operate as a legal person, which means that alimited liability company can be ormed. Under thelimited liability structure the company would own all othe ventures assets, but the liabilities o the investorswould be limited to their investment contributions.

To establish a cooperative venture the Chinese and

oreign partner(s) must submit documents such as aproject proposal, the signed agreement, contract, andarticles o association to the Department o Commerce orthe relevant local government authority or examinationand approval. I approval is granted, the partnershave 30 days in which to apply to the administrativeauthorities o industry and commerce or registrationand a business license. The date on which the businesslicense is issued is the date o the establishment o

the venture. The venture then has 30 days in which toregister with the tax authorities.

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Capital structure

Capital contributed to the venture by the two parties maybe in cash or in kind. Land use rights, industrial propertyrights, and other property rights are included as capitalcontributions. The cooperative joint venture law requiresthat both parties ulll their investment and cooperationrequirements as set out in the joint venture contract.Failure to do so within the prescribed time limit will resultin another time limit being set by the relevant authorities,and urther ailure will be handled in accordance with therelevant state provisions.

Capital contributions by both parties must be veriedby a Chinese-registered CPA rm (this may be eithera Chinese CPA rm or a Sino-oreign joint ventureaccounting rm), which will provide a vericationcerticate.


As with an equity joint venture, a cooperative jointventure operating as a limited liability company isrequired to appoint a board o directors or a jointmanagerial committee, that will make all major decisionsand oversee the management o the company.

The prots and losses o a cooperative joint venturewould normally be distributed according to the ratio

established in the contract, which may vary over thecontract terms. While the total amount provided orthe three reserve unds (sta welare and bonus und,general reserve und and enterprise expansion und) byan equity joint venture is expressed as a percentage othe ater-tax prot, the total amount provided or theseunds by a cooperative joint venture is expressed as apercentage o pre-tax prot.

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Similar to equity joint ventures, liquidation o cooperativejoint ventures must be conducted pursuant to the ForeignInvestment Enterprises Liquidation Procedures, eectiveas o July 1996. I it is agreed in the cooperative jointventure contract that all o the ventures xed assets willbelong to the Chinese party ater the ventures operatingperiod has expired, the parties to the venture may alsostate in the contract that the oreign party can recoverits investment during the contract period. Subject toexamination and approval, the oreign party may thenrecover its investment beore the payment o income tax.

Books and records

The books and records to be maintained are the same asor equity joint ventures (see Chapter 9).

Statutory audit

Requirements or audits are the same as or equity jointventures (see Chapter 9).

Wholly oreign-owned enterprises

Formation procedures

WFOEs are governed by the Law o the Peoples

Republic o China on Enterprises Operating Exclusivelywith Foreign Capital. Although this law came into orcein 1986, it was subsequently amended in 2000. A WFOEis a limited liability company.

The law and regulations prohibit or restrict theestablishment o WFOEs in certain industries.

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MOFCOM is responsible or the examination andapproval o WFOEs. Local governments are alsoauthorised to approve these enterprises, provided certainconditions are met.

Beore applying to establish a WFOE, the investormust submit a report, which must include specicinormation requested under the regulations, to therelevant government authority in the location in which theenterprise is to be established. The investor will receivea written response within 30 days o submitting thereport.

The investor must apply or registration and obtain abusiness license within 30 days o receiving approval, orthe approval certicate will automatically become void.The date the business license is issued will be the dateo the establishment o the enterprise. Tax registrationmust be perormed within 30 days o establishment.

Capital structure

The amount o registered capital o a WFOE shouldbe consistent with the scale o intended operations.The registered capital cannot be reduced during theterm o operation unless special approval is received,and increases must receive prior approval rom theauthorities.

Foreign investors may contribute capital in the orm oreely convertible oreign currencies or certied RMBprots rom other FIEs. Subject to certain requirementsset out in the regulations, such items as machinery,equipment, industrial property and proprietarytechnology may be capitalised according to theirmonetary value.

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The time limit within which the capital contributions areto be made must be specied in the application andarticles o association. The contributions can be madein installments. The rst installment representing noless than 15% o the total registered capital must bemade within 90 days and the last installment within threeyears o the issuance o the business license. Othercontributions must be made pursuant to the publishedschedule.

Ater all the capital contributions have been made,a Chinese-registered accountant must be engagedto veriy the contributions and issue an investmentverication report.


WFOEs are required to make allocations to a reserveund and a bonus and welare und or its employees

rom its ater-tax prots. The reserve und allocationsmust be not less than 10% o the ater-tax prots.Prots may not be distributed until the prior years losseshave been cleared.


As with joint ventures, liquidation o a WFOE mustbe conducted pursuant to the Foreign InvestmentEnterprises Liquidation Procedures, eective as o July1996. The specic tasks that the liquidation committeeis required to perorm are set out in the procedures andinclude paying o the enterprises debts, recoveringany unpaid contributions rom the shareholders anddistributing the remaining property. Any remainingassets o the enterprise that exceed the registeredcapital should be subject to income tax.

Books and records

The requirements or keeping books and records areessentially the same as or joint ventures (see Chapter 9).

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Statutory audit

See Chapter 9 or inormation on this topic.

Joint stock companies

Joint stock companies, also known as companies limitedby shares, are governed by the Company Law o thePRC issued in December 1993 and amended in October2005. In addition to the Company Law, joint stockcompanies are governed by the provisional regulationsregarding certain issues relating to the establishmento a oreign investment company limited by shares,promulgated on 10 January 1995. The provisionalregulations add certain requirements or the ormationo a joint stock company, including requiring a minimumo 25% o the capital to be invested by oreign investorsand a minimum capital requirement o RMB30 million.

Partnerships

See Chapter 16 or inormation on this topic.

Representative oces

Foreign enterprises are permitted to open representativeoces in China. Legally, these are to be establishedpurely or liaison purposes, and their activities are limitedto the provision o services that do not give rise to anyearnings. The permissible activities o representativeoces include the ollowing:

Investigating and collecting market inormation.1.

Providing introductory services to potential buyers2.and sellers, such as setting up meetings and passingon price and technical inormation to Chinesecustomers.

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Assisting in making arrangements or trade visits to3.China.

Coordinating with the parent company and other4.associated companies or aliates.

In practice, many representative oces provide servicesthat are outside this legal scope.

With the circular issued by the State Council in May2004, representative oces do not need to be approvedby MOFCOM or other relevant authorities except orrepresentatives whose headquarters are engagingin some special industries. Representative ocesare required to register with the State Administrationo Industry and Commerce. Upon approval o therepresentative oce, the chie representative should visitthe oce in person to receive the business registrationcerticate and complete some additional orms toormalise the registration.

The company is required to register with the local taxauthorities within 30 days o receiving the businessregistration certicate.

Company law

The Company Law o the Peoples Republic o Chinawas promulgated in December 1993 and amended inDecember 1999, August 2004 and October 2005. It wentinto eect on 1 January 2006. This national companylaw provides or the establishment o two types ocorporate entities, namely, limited liability companiesand companies limited by shares (also translated asjoint stock companies). It includes requirements onthe number o shareholders or promoters, minimumregistered capital, capital contribution timerame, sharetranser, board o directors, supervisory committee, orexample.

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The Company Law applies to oreign-invested limitedliability companies. However, where the laws on Sino-oreign equity joint ventures, Sino-oreign cooperativejoint ventures and WFOEs have dierent provisions, theprovisions o such laws apply.

The Company Law may pave the way or a largernumber o options or oreign investors to invest inChina. For example, under the Company Law, a oreigncompany may establish branches in China. A branchdoes not have the status o a Chinese legal person,and the oreign company assumes the civil liabilities oits branches in China. Any conditions or setting up abranch and any applicable limitations should be clearlyset out when the implementation regulations are issued.

So ar, branches o oreign companies have onlybeen approved in the area o nancial institutions andinsurance companies.

Other business arrangements open to oreign

investors

To acquire oreign technology, equipment and know-how, China utilises dierent methods o attractingoreign investment. In addition to the orms o businessenterprise mentioned above, these include barter trade,compensation trade and processing arrangements.

Barter trade

Under barter trade arrangements, China may importmachinery, equipment or oodstus in exchange or otherproducts. However, these arrangements are becomingless common in practice.

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Compensation trading

Under compensation trade arrangements, a oreign tradepartner may supply China with equipment, technicalservices and raw materials where needed. In return, itmay receive the manuactured products as payment.China trade partners are compensated or the processingee. In addition, it may acquire the equipmentsubsequently. Similar to barter trade, this type obusiness has become less common in China.

Processing and assembling trade

The processing and assembling trade constitutes a ormo cooperation in which oreign rms place orders withChinese actories to carry out certain manuacturingactivities or export. These activities generally consisto processing or assembling commodities according tothe oreign rms specications, with the parts or semi-

processed items supplied by the oreign rm.

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Restrictions on oreign investment andinvestors

Chapter 4

Key messages

The local currency, the renminbi (RMB), is not ullyconvertible.

Capital account items are closely monitored by theState Administration o Foreign Exchange.

Capital may be repatriated on liquidation o thecompany or on reduction o capital i approved.

Prots may be repatriated subject to certainconditions.

100% oreign ownership is permitted i certainrequirements are satised.

Foreign investment is categorised as encouraged,permitted, restricted or prohibited.

Foreign investment in sectors which are regardedas high resource-intensive, energy exhausting orpolluting are not welcome.

Regulatory climate

Regulatory authorities

The Peoples Bank o China (PBOC) is Chinas centralbank, and its many unctions include ormulating nationalnancial regulations and policies.

The State Administration o Foreign Exchange (SAFE)regulates the fow o oreign exchange in China and alloreign exchange expenditure and outward remittances.In practice, SAFE perorms a supervisory unction withregard to oreign exchange transactions conducted byFIEs.

SAFE regulates the fow o oreign exchange, and SAFE-designated oreign exchange banks handle the oreign

exchange and banking transactions o enterprises withoreign investment, i.e. equity joint ventures, cooperative


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joint ventures and WFOEs. The SAFE-designated oreignexchange banks can be both domestic and oreigninvested nancial institutions.

The Ministry o Commerce (MOFCOM) and its localsubsidiaries are the major government authorities thatdeal with matters relating to oreign investment in China.They have authority over the approval o enterpriseswith oreign participation and import o technology.MOFCOM and its local subsidiaries are likely to have themost contact with oreign investors.

Other industrial ministries such as the China BankingRegulatory Commission, the China Securities RegulatoryCommission, the China Tourism Administration, theMinistry o Communications, or example. also play a rolein granting pre-approval to oreign investment in theirrespective industries.

Regulatory legislation

The oreign exchange administration o China is basedprimarily on the Regulations on Foreign ExchangeAdministration o the Peoples Republic o Chinaeective rom 1 April 1996. Apart rom this regulation,the Peoples Bank o China issued another major oreignexchange regulation to govern the settlement, sale andpurchase o oreign exchange on 1 July 1996.

FIEs are required by SAFE to separate their oreigncurrency bank accounts into capital accounts andcurrent accounts. The capital accounts hold the capitalunds injected by an enterprises oreign investors,oreign currency loans borrowed, and oreign loansrepaid, or example. The current accounts hold oreignexchange used by the enterprise or regular day-to-day operating items. Ater the separation o the capitalaccount and the current account, RMB transactions

under the current account are reely convertible (subjectto certain procedural controls) as long as the transactions

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are considered commercially legitimate. However, inthe case o capital accounts, the convertibility o thecurrency is still subject to the approval o SAFE on atransaction-by-transaction basis. In addition, in thepast, a maximum limit was placed on the amount ohard currency deposited in the current account, basedon the level o the enterprises capital contribution andexport activities. Recently, such restrictions have beenremoved. Enterprises are allowed to keep all their hard

currency received.Subsequent to the issuance o the revised Law o Sino-oreign Joint Ventures and the Law o Wholly Foreign-owned Enterprises eective rom 15 March 2001 and 31October 2000 respectively, FIEs are no longer required tobalance their oreign exchange income and expenditureby means o export activities and instead, may purchaseoreign currencies rom the bank or payment o currentaccount items overseas i such needs arise.

Registration o oreign capital and technology

Capital

Capital contributed to an equity joint venture by aoreign investor is generally required to be at least25% o the total investment. All capital contributionsto oreign-invested enterprises must be registered

with the appropriate authorities. Any increases,assignment or other disposal o the registered capitalo a oreign-invested enterprise must be approved bythe original examination and approval authority.

Investments can be made either in cash or in kind,and the value o the capital contributions must becertied by a Chinese certied public accountantwho issues a capital verication report relating tothe contribution. Cash contributions will be heldin the capital accounts in oreign currency, and theconversion rom oreign currency to RMB is subject toSAFE approval.



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There are rules governing the ratios o registeredcapital to total investment or equity joint ventures,cooperative ventures and WFOEs. Registered capitalrepresents the capital contributions o the oreign andChinese parties, while total amount o investmentincludes the registered capital as well as loansborrowed by the enterprise. The ratios are shown inTable 2.

Table 2: Foreign Investment EnterprisesRatios oRegistered Capital to Total Investment

Total investment RatiosMinimum

registered capital

Under US$3 million($3 million inclusive)

0.7:1 70% o totalinvestment

Between US$3 and10 million ($10 millioninclusive)

1:2 US$2.1 million

Between US$10 and30 million ($30 millioninclusive)

2:5 US$5 million

Over US$30 million 1:3 US$12 million

Loans

FIEs may apply to designated oreign exchange banksto borrow both oreign currency and RMB loans. FIEsare also permitted to take out oreign currency loanswith overseas banks. Foreign currency loans must beregistered with SAFE within a certain period o timeater the execution o the loan documents in orderto enable the subsequent loan repayment. Penaltyprovisions apply or ailing to comply with the debtregistration requirements.



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Technology agreements

Technology agreements that cover the licensing o theuse o patents, trademarks, the provision o technicalconsultancy services and technical know-how, requireregistration with the MOFCOM. Royalty payments ortechnology transer agreements may be subject to theapproval o MOFCOM or its local subsidiaries.

Repatriation o capital and earnings

Capital

One o the major dierences between an equityjoint venture and a cooperative joint venture relatesto the repatriation o registered capital. In the caseo a cooperative venture the oreign partners mayrecover and repatriate their invested capital during theoperating period o the venture, provided they haveobtained the agreement o all the parties concernedand the approval o the relevant authorities.

The partners in an equity joint venture, however,cannot obtain repayment o their registered capitaluntil the end o the venture period or its liquidation.This restriction also applies to WFOEs.

Reduction o capital is possible with approval romMOFCOM or its local subsidiaries.

Earnings

FIEs may repatriate their prots rom China subject tocertain restrictions, as ollows:

All the prior years losses must have been1.recouped.

All relevant taxes must have been paid.2.

The board o directors approve the distribution o3.

prots.Prots may be repatriated through designated4.oreign exchange banks.



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Prots earned by a oreign enterprise with a permanentestablishment in China are subject to income tax.However, they will not all into a withholding tax regimewhen the prots are repatriated.

Foreign companies without permanent establishments inChina are subject to withholding tax at a concessionaryrate o 10% on dividend, interest, rental, royalty, andother income sourced in China unless the rate o tax isurther reduced by a double taxation treaty.

Restrictions on oreign investment

Restrictions on oreign ownership

Wholly oreign ownership

The Chinese government permits 100% oreignownership in industries not prohibited or restrictedby the state that are conducive to the developmento Chinas economy and capable o achievingremarkable economic benets in accordance with theCatalogue on Guiding Foreign Investment issuedby the State Council and eective rom 1 January2005. According to the revised Law o WhollyForeign-owned Enterprises and its implementationrules eective 12 April 2001, WFOEs that are able toachieve the ollowing objectives will be encouraged:

Use o advanced technology.1.Research and development o new products.2.

Upgrading o products.3.

Capable o saving energy and raw materials.4.

Export-oriented.5.

Ventures with Chinese partners

Joint ventures between oreign and Chineseenterprises are encouraged by the state ithey promote the development o the Chinese



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Repatriation or transer o investment proceeds.4.Assignment and subrogation rights.5.

Guarantees regarding exchange rates on transers or6.remittances.

Denition o investments and returns.7.

Policy trends

Eect on oreign investment

Chinas current policy is to restrict oreign investmentthat will impair Chinas sustainable development. Foreigninvestment in sectors which have low technologicalcontents, cause high exhaustion o resources or bringabout serious pollution, is not welcome. Quality ratherthan quantity seems to be what China is aiming or in itscurrent oreign investment policy. The ocus has shitedrom acquiring oreign capital and oreign exchange toattracting advanced technology, management know-howand talents, with increasing consideration being given toenvironmental protection.

Currently, oreign investors in general may nd it moreavourable or purposes o ull management and controlto set up WFOEs than joint ventures except in thoserestricted industries where WFOEs are not allowed.

Setting up an investment project in China requires careulplanning, particularly in such areas as raw materialsourcing, marketing and distribution, and the taxationimplications o dierent types o projects and activities.See Appendices XII, XIII and XIV or more detaileditemisation o points to consider.



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Investment incentivesChapter 5

Key messages

Qualied small and low-prot enterprises and qualiedhigh/new-tech enterprises are subject to reducedincome tax rates.

Enterprises or projects with a ocus on technologicaldevelopment, environmental protection, energy and/or water conservation, production saety, or example,may be entitled to various types o income tax

incentives.Tax incentives or oreign investment enterprises o aproductive nature and most o the geography-basedincentives have been removed. A grandather periodis available or certain incentive policies.

Passive income derived by oreign enterprises romsources in China was subjected to a withholdingtax o 20%, which has since been reduced to a

concessionary rate o 10%. However, an exemption isavailable under certain circumstances.

Qualied projects may enjoy certain VAT incentives.

Technology transer, technology development andrelated services are exempt rom business tax (BT).

Investment policy

Under Chinas Corporate Income Tax Law (CITL) thattook eect on 1 January 2008, a predominantly industry-oriented, limited geography-based tax incentivepolicy has been adopted which represents a signicantchange rom the ormer regime. Key emphasis is placedon industry-oriented incentives aimed at directinginvestment toward those industry sectors and projectsthat are encouraged and supported by the Chinesegovernment. The CITL clearly refects the governments

ocus on technological development, environmental


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protection, energy and/or water conservation, productionsaety, venture capital and continuing investment inagriculture, orestry, animal husbandry, sheries andinrastructure development. The CITL has also delegatedauthority to the State Council to propose the scope anddenition o eligible projects and to adjust such scope otax incentives rom time to time in accordance with thecountrys needs.

Tax incentives and concessions

Eligibility

Unlike under the old income tax law, the CITL hasintroduced a number o dierent types o tax incentives,including tax exemptions or reductions, discounts ontaxable income, super deductions o expenses andinvestment tax credits on qualiying expenditures. The

qualiying criteria are dierent amongst the various taxincentives. While some tax incentives are granted aterullling certain criteria or an enterprise or a project,some incentives may be granted only ater meetingcertain criteria or a particular transaction.

In addition to the income tax incentives noted above,qualied enterprises or projects may also enjoy certainVAT and BT incentives.

The major tax incentives are set out below:

Income tax incentives

Income tax rate

Under the CITL, a fat tax rate o 25% applies toall enterprises, including domestic enterprises,enterprises with oreign investment and oreignenterprises.

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Income tax exemption and reduction

The ollowing income is exempt rom corporateincome tax:

(1) Interest derived rom government bonds.

(2) Dividends and income rom equity investments,or example, derived by a resident enterprise romanother resident enterprise.

(3) Dividends, income rom equity investments,or example, derived by an establishment o anon-resident enterprise whereby the income iseectively connected to the establishment.

(4) Qualied small and low-prot enterprises areentitled to a reduced income tax rate o 20%.

(5) Qualied new high-tech enterprises are entitled toa reduced income tax rate o 15%.

(6) Income derived rom the ollowing types oprojects may obtain an income tax exemption orreduction:

Agriculture, orestry, animal husbandry and-shery projects.

Inrastructure projects supported by the-Chinese government.

Environmental protection projects and/or-energy and/or water conservation projects.

Qualied technology transers.-

Other income tax incentives

A super deduction is allowed or R&D expenses-or new technology, new products or newcratsmanship.

A super deduction is allowed or salary costs-incurred or hiring the disabled.



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The taxable income o a venture capital business-may be reduced by a certain amount withreerence to the investment amounts made in highand new tech enterprises.

Shorter tax depreciable lie or accelerated-depreciation methods are allowed or particulartypes o xed assets related to technologyadvancement.

A reduction in taxable income is allowed or-revenue derived rom products manuacturedwith comprehensive resources pursuant to stateindustry policies.

An investment tax credit is allowed on qualied-expenditure or plant and machinery that urthersenvironmental protection, energy and waterconservation, production saety, and otherbenets.

Other incentives ormulated by the State Council-to address requirements or economic and socialdevelopment or where emergency circumstanceswithin the country may so require.

Grandathering o previous preerential tax treatments

Foreign investment enterprises established beore-the promulgation o the new CITL and which

currently enjoy a lower income tax rate are entitledto a gradual increase to the rate o 25% over aperiod o ve years starting rom 2008.

Unused tax holidays o oreign investment-enterprises established beore the promulgationo the new CITL can be enjoyed until their expiry.Where the tax holiday has not yet started becauseo tax losses, it shall be deemed to commence

rom 2008.



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New high-tech enterprises that are regarded as-supported by the State established in the SPZsand Pudong New Area enjoy certain transitionalpreerential tax treatment.

Enterprises in encouraged industries located in the-Western Regions will continue to enjoy existingpreerential tax treatments until expiry o thepreerential policy.

VAT incentives

VAT on import and export

Many categories o goods imported or the productiono export items may be exempt rom import VAT. Inmost cases, the exemption will not apply i the nishedgoods made rom the imported items are sold on thedomestic market.

In regards to export, currently the standard ratesor export VAT reund range rom 0% to 17%. Aterdeducting reundable VAT rom the general input VATat 17%, enterprises incur a cost o the nonreundableVAT ranging rom 17% to 0% or most export items.Please reer to Chapter 18 Indirect Taxes or detailso export VAT reund mechanism in China. However,it should be noted that the Chinese government hasbeen reducing the export VAT reund rate in recent

years.

VAT reorm towards consumption based VAT system

The current production based VAT system precludesgeneral VAT taxpayers rom claiming credit or inputVAT incurred on xed assets. Such input VAT has tobe capitalised as part o the xed assets costs andcharged to the income statement through depreciation.



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Beginning on 1 July 2004, China launched a trialrun o a consumption based VAT system in theNortheast Region as a means to stimulate the regionsinvestment and economy. Thereater, general VATtax-payers engaged in at least one o the eightselected industries in the region have been allowedto claim input VAT incurred on xed assets subject tocertain limits. In May 2007, China decided to urtherexpand the consumption based VAT reorm to eight

slightly dierent industries in the Central Region oChina. These trial runs o VAT reorm are believedto have mitigated the tax burden o investors andencouraged them to make xed asset investmentsand upgrade their production with more advancedtechnology.

VAT incentives on sales o sel-developed sotwareproducts

According to the existing tax regulations, sales osel-developed sotware products by a VAT generaltaxpayer would be eligible or a reund o VAT liabilitiesexceeding 3% o net sales beore 2010.

VAT exemption on import equipment underencouraged projects

The equipment and machinery imported by FIEswithin their total investment or sel use are exemptrom import VAT and customs duty. In order to qualiyor the exemption, the FIEs should be engagedin industries listed as encouraged in the oreigninvestment catalogue.



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BT incentives

In general, transer o intangible assets in China issubject to BT at a fat rate o 5%. In order to encouragetechnology advancement, the government has allowedthat the income derived rom technology transer,technology development services and related technicalconsultancy and technical services be exempt rom BTater meeting certain assessment criteria.

Individual Income Tax (IIT) Relie

In general, all compensation paid to employees in Chinais subject to PRC IIT at progressive rates. However, thereis special relie or oreign individuals working in China inthat some o their income rom Chinese employment maybe exempt rom IIT. The non-taxable income includeshousing allowances, meal and laundry allowances, homeleave allowances, relocation allowances, and must meet

certain conditions. Please reer to Chapter 17 Taxationo Individuals.



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Banking and nanceChapter 6

Key messages

The central bank is responsible or implementingmonetary policy, preventing and resolving nancialrisks, and sae guarding nancial stability.

In accordance with commitments by China to theWTO, oreign invested banks are allowed to conductoreign currency business with Chinese enterprisesand individuals throughout China, and are able to

conduct domestic business with Chinese individualswithout geographic restrictions.

National stock markets in Shanghai and Shenzhen areaccessible to domestic and oreign investors.

FIEs have access to local nancing.

Banking system

The commencement o the reorm programme in thelate 1970s saw major changes in the banking system,with the Peoples Bank o China (PBOC) retaining therole o central bank and specialised banks given moreautonomy to make transactions on their own authorityrather than in accordance with state plans. The reormso the 1980s saw a number o major developments,including decentralisation o decision-making powerto local bank branches and the development o money

markets and o stock and bond trading.Further reorms were introduced in 1993. In thesereorms, the role o the PBOC as the central bank wasstrengthened, and the operation o government-ownedspecialised banks were commercialised.


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Banking and nance

In 1998, two critical reorms were implemented by thePBOC. These include the reorganisation o PBOCbranches according to economic regions, whicheectively reduced the number o branches rom 32 to9 and removed the insurance supervision unction romthe PBOC and gave it to the newly established ChinaInsurance Regulatory Commission.

Early in 1994 saw major changes in the oreign exchangesystem, when the dual exchange rate policy was abolishedand the renminbi (RMB) was placed in a controlled-foatsituation based on market supply and demand.

In 2003, a new institution the China Banking RegulatoryCommission (CBRC) was established to take over romthe PBOC the supervisory responsibility or the nancialindustry.

Central bank

The PBOC has ministry-level status and reports directlyto the State Council. Its main responsibilities include theollowing:

Drating and enorcing relevant laws, rules andregulations that are related to ullling its unctions.

Controlling the money supply.

Formulating and implementing monetary policy in

accordance with the law.

Regulating nancial markets, including the inter-banklending market, the inter-bank bond market, the oreignexchange market and the gold market.

Maintaining the RMB exchange rate at an adaptive andeven level.

Holding and managing the state oreign exchange andgold reserves.

Perorming other unctions prescribed by the StateCouncil.

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